Spending Crisis – Part I

           This is the first post in our series about the spending crisis. It is a spending crisis and not a debt or deficit crisis because it is the spending that drives both the debt and deficits. It is a moral rather than an economic crisis because preventing the crisis requires only summoning the national will to control spending. It is about who we are as a people, what kind of country we bequeath to our children and our national security and survival. I have marshalled all the facts, logic and wordsmithery I possess to explain this crisis in an objective and non-political manner.

Our series is in four parts. Part II, Analyzing the Data, will be distributed May 5, Part III, Possible Solutions, on May 12, and Part IV, Can Catastrophe Be Averted?, on May 19. The full series is now on our website www.mllg.us. The series was reviewed in advance by three experts with diverse viewpoints. I carefully considered all their feedback, incorporated much of it and offered to publish any dissenting opinions.

         In addition to my MBA, CPA background, I have studied economics for 50 years. I devoted much of one summer in Montana to constructing a quantitative model of the US economy, including the deficit, which has proven to be highly accurate. I have been writing about the crisis of spending, debt and deficits for over a decade.

Background Information

         US GDP now is $21.0 trillion; the public debt is $16.3 trillion, while the total debt is $22.2 trillion. This results in a public debt to GDP ratio of 77.6% and a total debt to GDP ratio of 105.7%. The $5.9 trillion difference between the total debt and the public debt consists of intragovernmental debt, which mostly is money owed to Social Security and, to a lesser extent, to FHA and other agencies. For example, when Treasury spent the Social Security surplus, it issued special non-negotiable bonds.

        Throughout this series we use the public debt ratio and not the total debt ratio because intragovernmental debt is notional, with interest accrued and not paid in cash. It is analogous to writing yourself an IOU. Most who cite the higher total debt ratio do so out of ignorance or as a scare tactic. However, there are some credible sources who believe total debt is more relevant than public debt. If they are right, our debt ratio is 105.7% and not 77.6% and America is much worse off than described in this series.

           There are some who minimize the seriousness of the current ratio because it was higher (115%) in the aftermath of WWII (the only time prior to 2009 it was above 50%) and America easily recovered. However, the WWII deficit saved America from totalitarianism and was transitory. Afterward, war expenses ceased, Social Security ran surpluses, Medicare didn’t exist and demographics were favorable. Now, the deficit is structural; Social Security, Medicare and pensions run huge deficits and demographics are bleak. We are in the tenth year of an economic expansion and growth is 3%; yet, the FY 2019-2020 deficit will be $1.1 trillion and increasing each year thereafter.

       It must be noted that many states, counties and cities also are in serious debt trouble and will, at some point, require federal government bailouts. Private debt is hovering at an all-time high. The world debt to GWP (Gross World Product) ratio currently is 84% and spiraling upward. Global debt (public and private) is $230 trillion and is over 300% of GWP. Although these issues are beyond the scope of this spending crisis series, they deserve at least some recognition.

          We close with some examples that seem to defy expectations. Japan’s debt ratio is 250%, but dedicated pension assets lower the effective ratio to 110%. The NIKKEI index is down 46% from 1989 and economic growth is 1% amidst chronic deflation. Greece’s ratio hit 180%; it avoided default due to its small size and bailout by the EU. It’s economy contracted, pensions were halved and there was social and political upheaval. Italy, with a 130% ratio, is following in Greece’s tracks. Even though they avoided default, Japan, Greece and Italy did not escape the consequences of massive debt; they all have suffered lost generations and their crises are far from resolved.